Stock Exchange: What’s On Your Pre-Trade Risk Checklist?
The Stock Exchange is all about trading. Each week, we do the following:
- Discuss an important issue for traders,
- highlight several technical trading methods, including current ideas,
- feature advise from top traders and writers, and
- provide a few (minority) reactions from fundamental analysts.
We also have some fun. We welcome comments, links and ideas to help us improve this resource for traders. If you have some ideas, please join in!
Review: Models Gone Wild
Our previous Stock Exchange reviewed the dangers of Models Gone Wild. We reviewed some of the risks of allowing trading models to do their thing without human supervision. We also discussed a few ways NOT to build a trading model.
This Week: Pre-Trade Risk Checklist
Do you have a checklist you run through before you place your trades? For example, do you pay attention to ex-dividend dates, earnings announcements and/or anything that has the potential to move the price of the underlying security and thereby impacting the success of your trade?
This week is potentially a very important week for running through your pre-trade checklist because market moving things are happening, such as:
- Earnings: We are in the middle of earnings season, and unexpected earnings information can have a big impact on your trades.
- The Fed: The fed is expected to announce a potential cut to interest rates this week, and any unexpected language and decisions can also have a big impact on the success of your trades.
- Economic Data: There is no short supply of economic data being released this week that can impact the market and your trades, as Jeff described in this week’s Weighing The Week Ahead.
- Volatility: Has the market been more or less volatile than usual? Have you adjusted your targets and stops accordingly?
- The Lazy Trader offered a few ideas about what’s on his pre-trade checklist, such as quality of setup, risk/reward, capital, stop-loss, and state of mind. If your mind isn’t in the right place then your trades may also not be right.
- Richard Snow also recently shared a few things on his pre-trade checklist, including trending versus ranging markets, support/resistance, indicators, risk/reward, economic releases, and following your trading plan.
Of course there a plenty of considerations that go into building a trading model long before you even get to the pre-trade checklist. We’ll go into more detail about our trading models, as well as some recent trades, later in this report.
Worth noting, The Stock Exchange has moved to Tuesday publication. As Jeff mentioned in his previous WTWA, we are doing doing this to create more separation between the stocks discussed and our own adjustments. While we warn investors that these are just ideas. They are not intended for readers to follow without research or determining the suitability for their portfolios. We also warn that we may trade out of positions without notice. Even with all of that in mind, a little more separation between publication and trading would be better.
Before getting into some specific recent trading examples, we are sharing the performance of our proprietary trading models as our readers have requested.
Worth a reminder, our models increase and decrease their cash levels based on market conditions, so the performance in the table can appear more dramatic than reality, especially when considering the strategies are often combined with some of our longer-term strategies as well. For example, Athena is now fully invested and Holmes is only 10% invested.
Expert Picks From The Models
Note: This week’s Stock Exchange report is being moderated by Blue Harbinger, a source for independent investment ideas.
Holmes: I recently purchased shares of Lending Tree (TREE) on July 26th. How do you feel about that?
Blue Harbinger: Lending Tree operates an online loan marketplace for consumers seeking loans in the United States. Its mortgage products comprise purchase and refinance products. Why’d you buy?
Holmes: I am a dip buyer (you can see the dip in the chart above). However I am currently only about 10% invested (as mentioned previously). My typical holding period is usually around 6 weeks.
Blue Harbinger: Given the strong momentum of the market lately, that may be a good idea. And of course, you may get some good dip buying opportunities later this week depending on the results of the Fed as well as companies announcing earnings. By the way, here is a look at the F.A.S.T. Graph for Lending Tree, in case you want to consider a little more than simply price dips.
Holmes: There is more to my trading model that just buying the dips. You can email Jeff for a detailed explanation/write-up on each of the models.
BH: A little sensitive for a computer model, are we Holmes? Anyway, how about you Athena–any trades to share this week?
Athena: I sold my shares of Worldplay (WP) on 7/23. You’ll recall I purchased them back on 7/12.
BH: Looks like you turned a nice profit on that one. And as mentioned earlier, you’re currently 100% invested, unlike Holmes at only 10%. Are you invested fully because market conditions are currently more conducive to your momentum-based trading strategy.
Athena: Yep–checking out current market conditions is part of my pre-trade checklist.
BH: Here is a look at some fundamental data in the following F.A.S.T. Graph in case you want to check out a little more data.
Athena: Thanks, but I look for stocks having strong positive trends and then select only those with the very strongest trends (“king of the hill”), constantly replacing the ones with weaker trends. It should not surprise anyone that I bought WP when I did. A quick look at the chart should make the strength of the trend fairly obvious. And I generally continue to hold my positions until either the strength of the trend abates or a stock with an even higher trend strength comes along. I don’t have a set “holding period” for a position. I will exit only when either a stronger stock comes along or if market conditions dictate a strong potential for loss – capital preservation remains the key driver in all situations.
Roadrunner: I bought shares of Wayfair (W) last week. As you know, I like to buy stocks in the lower end of a rising channel.
BH: Road Runner, that channel doesn’t appear to be rising to me. Anyway, Wayfair is in the e-commerce business in the US for the “Homes” sector (the company offers a selection of furniture, décor, decorative accents, housewares, seasonal décor, and other home goods through its sites). Here is a look at the F.A.S.T. Graph.
Road Runner: Yes, generally speaking I like to buy in the lower end of a rising channel. But more specifically, I look for a certain type of situation (some call it a pattern, others may call it a setup, etc.) where the probability of a particular action is not a matter of chance (50/50) but has been historically noted to result in a greater tendency towards a particular outcome. “Trending in a channel” is one such situation. An equity will often “cycle” between the upper and lower bounds of that channel for substantial periods of time. My model design attempts to take advantage of this property by identifying stocks trending in an upwards channel and waiting until the stock price drifts to the lower bound, making it a candidate for purchase. These types of situations have a relatively high probability of positive outcome with a reasonable profit potential. Wayfair can be seen to be in this type of a situation. This is a short-term trade that has traditionally shown profitability when the right conditions have been met. One way or another, I’ll be out of it shortly – usually after about 4 weeks.
If you are placing trades this week, it’s a big week to pay attention to your pre-trade checklist. There are a lot of things to look out for this week that could impact the success of your trades. The Fed and earnings announcements are a couple of the big ones, but market conditions (are we trending or range bound) is always another good one to keep on your radar. What’s on your pre-trade checklist?
Readers are welcome to suggest individual stocks and/or ETFs to be added to our model lists. We keep a running list of all securities our readers recommend, and we share the results within this weekly “Stock Exchange” series when feasible. Send your ideas to “etf at newarc dot com.” Also, we will share additional information about the models, including test data, with those interested in investing. Suggestions and comments about this weekly “Stock Exchange” report are welcome. You can also access background information on the “Stock Exchange” here.
Trade alongside Jeff Miller: Learn more.